Digital Currency Group (DCG), the crypto conglomerate that owns lender Genesis Trading and asset manager Grayscale, among others, announced today that it has closed its asset management division called HQ Digital, causing new fears in the bitcoin and crypto industry, as the company manages $3.5 billion in total assets in December.
A memo obtained by The Information stated that HQ Digital was closed due to “the general economic environment and the ongoing crypto future, which created significant headwinds for the industry,” and that the company may revisit the project in the future. It is a subsidiary of DCG which was formed last year.
The firm’s partners were reportedly blindsided by the decision. Indeed, the news came on the same day that DCG announced massive layoffs at Genesis Trading amounting to 30% of employees.
It should also be noted that the shutdown has been in effect since January 2, according to the report. At the end of last year, many altcoins owned in large quantities by Barry Silbert’s company experienced a sell-off and prices dropped.
This has fueled rumors and rumors that DCG CEO Barry Silbert may be dumping his assets on the market. Thus, today’s news can explain the crash of Ethereum Classic, Filecoin, ZEN, and NEAR in mid-December.
DCG Bankruptcy Fears Grow In Bitcoin Market
Now, the news is set to cause more panic in the crypto community, fueling fears that DCG and Grayscale could go bust. However, the move should be seen in the context of DCG’s corporate restructuring that Barry Silbert undertook late last year.
Meanwhile, the pressure on Barry Silbert continues to grow. Gemini founder Cameron Winklevoss published an open letter earlier this week accusing Silbert of stalling and giving a January 8 deadline to return $900 million in Gemini Earn customer funds.
In addition, Valkyrie Investments recently made DCG’s bid to become the new sponsor and manager of Grayscale Bitcoin Trust (GBTC), while announcing the launch of an opportunistic fund to take advantage of Grayscale Bitcoin Trust’s discount. The $3.5 billion asset manager Fir Tree, on the other hand, has filed a lawsuit against DCG.
Apparently, DCG faced a lack of liquidity that was revealed after the collapse of FTX, forcing Genesis to postpone redemptions and new loans. Tommy Shaughnessy, co-founder and co-lead of Delphi Ventures, breaks down the situation of DCG as follows:
– DCG Debt $2.025B
– Genesis can call in $1.675B in loans
– Genesis owes $900M to GeminiDCG Liq
– Gray scale $10B AUM x 2% = $200M x 3x times = $600M
– GBTC/ETHE Holdings = 9.7%/3.8% = $629M at discount, $1.17B at par
– Book VC = Firesale value in bear
Possible solutions for DCG
As Shaughnessy explained, Grayscale is likely to raise $600-800 million in 3-4x if sold. However, the generation of future fees is under pressure because there is a lawsuit for Reg M relief to close the discount.
Grayscale DCG’s holdings could bring the company $1.17 billion. On the one hand, DCG was able to sell Grayscale Bitcoin Trust (GBTC) and ETHE on the open market, currently worth $629 million. However, DCG is facing “crazy slippage so let’s call it a 25% haircut or $471M,” Shaughnessy said, explaining further; “Lose trust, nuke market. Get $1.2B at par, possibly $900m with 25% haircut on nuking.
However, the latter of the two alternatives would make the sale of Grayscale impossible, so according to the founder of Delphi Ventures, there are two main options:
1/ Sell Grayscale and sell GBTC/ETHE ownership =$600M + $471M =1.071B
2 / Unwind Grayscale (can’t sell if unwind) and get assets back at par or $900M.
There are not enough options to bring in the $2.05B needed. So where will the rest come from? According to Shaughnessy, it could be from Silbert’s risk book or DCG:
Maybe Barry, but I’m not going to back down because of the risk. Maybe DCG sports book, but doubt with the firesale prices in the bear.
There is a big drawback. I think it will be too crowded and drawn out. Gemini can bridge the gap between what they get from Genesis (from DCG) and equity or private ownership.
At press time, the price of Bitcoin stood at $16,783, still showing historically low volatility.
Option images from CNBC, Charts from TradingView.com